Can Streaming Save the Video Kiosk?

When Coinstar Inc. (NASDAQ: CSTR) reported earnings last night, the owner of the Redbox DVD-rental machines beat earnings estimates by 27%, but net income was down by the same amount for the quarter. Sales were up, but well below estimates. And then things got worse.

The company said that it expects fewer new videos this quarter, and that will have an impact on revenues and profits. First-quarter guidance for revenues of $568 million to $593 million is well short of the consensus estimate of $624.18 million. EPS guidance of $0.77 to $0.93 is even further short of a consensus estimate of $1.21.

Fewer new DVDs and the lack of top-quality videos and movies is not going to help Coinstar's streaming video joint venture with Verizon Communications Inc. (NYSE: VZ) because content producers like movie studios and cable channels have dragged their feet on releasing programming for streaming. Netflix Inc. (NASDAQ: NFLX), once the favorite of content producers, also has become a red-headed stepchild as the producers launch their own streaming channels in an effort to capture more revenue. Either that, or raise their demands so much that content costs batter profits.

The basic way for Netflix and Redbox Instant to fight this is to add subscribers, something that Netflix did quite well in the fourth quarter, with nearly 5.5 million new subscribers. Redbox Instant has rolled out on the Xbox 360 from Microsoft Corp. (NASDAQ: MSFT), and is scheduled to roll out widely by the end of the current quarter. To compete with Netflix or Amazon.com Inc. (NASDAQ: AMZN), Redbox Instant will need to spend big money, which is presumably the reason for Verizon's inclusion in the streaming joint venture.

But it will be an uphill struggle. Here is a snippet from Netflix's recent quarterly report:

[W]e looked at the top 200 titles on Netflix: our 100 most popular movies and our 100 most popular TV shows in Q4. Of these 200, 113 are not on Amazon Prime, Hulu Plus or Redbox Instant. Of the 87 that are available on at least one of these services, Hulu Plus offers 27 of the 200; Amazon Prime 73 of the 200; and Redbox Instant 12 of the 200, with significant overlap in TV between Hulu Plus and Amazon Prime, and in movies between Amazon Prime and Redbox Instant. In other words, when it comes to the most popular content with members on Netflix, none of these services are good substitutes to Netflix.

Redbox Instant has yet to launch officially, but Coinstar's complaints about content are not going to fix this problem. In Coinstar's favor is that Netflix and Amazon have the same problem, although Netflix's foray into original programming could help it offset the lack of cooperation from the studios and cable channels. But producing content is expensive too.

The other heavyweight competition will come from Google Inc. (NASDAQ: GOOG) and its 600-pound video gorilla, YouTube, and its sponsored channels that YouTube is expected to test as paid subscriptions.

Coinstar's shares are down about 7.6% today, at $48.16 in a 52-week range of $40.50 to $71.82.